Forward Volatility
The volatility the options market prices in for a specific future window — extracted by comparing two expiry dates on the same underlying.
Definition
Forward volatility is the implied volatility the market expects to prevail over a specific future period that starts after the near-term expiry and ends at a far-term expiry. Just as a forward interest rate represents the cost of borrowing between two future dates, forward volatility represents the expected "cost of risk" in that future window. It is not directly observable from a single option; instead it is extracted from the term structure — the set of at-the-money implied volatilities across multiple expiry dates on the same underlying. On NSE, where Nifty has weekly and monthly expiries, traders can compute forward vol from any pair of expiries to understand what the market prices in for event windows such as quarterly earnings or RBI policy meetings.
Why it matters
Forward volatility matters most to traders running calendar spreads or diagonal spreads, and to anyone trying to understand whether a specific future event is fairly priced in the options market. If the market implies that volatility will be high between the current expiry and next month's expiry — because, say, a Union Budget or US Fed decision falls in that window — the forward vol for that period will be elevated relative to the rest of the curve. A trader who disagrees can sell the far-expiry option and buy the near one (a calendar spread), in effect selling the forward vol. Institutions managing large portfolios on NSE also use forward vol to assess the cost of rolling hedges across monthly expiries — a flat or inverted term structure (near IV higher than far IV) signals near-term stress that may not persist, making far-dated protection relatively cheap.
Formula
Forward variance between T1 and T2 (where T2 > T1) is: σfwd² = (σ2² × T2 − σ1² × T1) ÷ (T2 − T1). Forward volatility = √σfwd². Here σ1 and σ2 are the ATM IVs of the near and far expiries respectively, and times are in years. The formula assumes flat volatility within each segment — a simplification, but useful for quick estimates.
Example
Suppose Nifty's weekly expiry (7 days, T1 = 0.027 yr) has ATM IV of 13 percent, and the monthly expiry (35 days, T2 = 0.135 yr) has ATM IV of 17 percent. Forward variance = (0.17² × 0.135 − 0.13² × 0.027) ÷ (0.135 − 0.027) = (0.003899 − 0.000457) ÷ 0.108 ≈ 0.03187. Forward vol ≈ √0.03187 ≈ 17.8 percent. The market is pricing in roughly 17.8 percent volatility for the 28-day window after the weekly expiry — elevated relative to the weekly reading, suggesting a known event risk in that period. All figures are hypothetical.
Compare expiries on TradePulse
TradePulse shows ATM IV across weekly and monthly Nifty expiries so you can spot forward vol opportunities before they move.